What Happens When You Don't Pay Off Loans From Banks?

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When you take out a loan, the bank puts a lot of trust in you. Without really knowing your or some of your financial habits, it lends money based on the hope that you'll keep your promise and pay it back. If you don't, the bank has many ways to get its money back from you. These tools include the ability to report that you didn't pay back your loan, making it hard for you to borrow from anyone else.

When you miss a loan payment, your lender will report it to the credit bureaus. Typically, this happens when you become 30 days late. Having a late payment on your credit will probably make your score go down. If you have very good credit, it could easily drop by 100 points or more. This can make it harder, more expensive or both to get more credit in the future. While it will usually take seven years for the late payment to drop off your credit report, you can fix the problem and bring the loan up to good standing by making your missed payment.

Eventually, the bank will give up on your loan. When it does that, it usually turns your loan over to a collection agency. This does more damage to your credit report. In addition, while your bank was probably calling you and sending you letters, the collection agency may be even more aggressive in pursuing payment from you.

Collateral is Subject to Repossession

When your bank loan has collateral -- like a car loan that is backed by your car -- the bank can eventually seize the collateral. The time frame that the lender has to take the collateral varies based on your loan agreement and your state's laws. Unsecured loans, like student loans or credit cards, don't have any collateral, so the bank can't seize anything directly.

Eventually, either the lender or the collection agency may decide to sue you in court. If it is able to win its case and get a judgment entered in its favor, the court will get involved in helping it collect the debt. The court can make your employer divert wages to pay off the judgment, pull money out of your bank accounts or sell your property even if it wasn't pledged as collateral. If you don't comply with the court's requirements or show up when you're supposed to, it could even issue a warrant against you and potentially have you arrested.

When you owe money to a bank where you also have a checking or savings account, it can seize that account. This power is referred to as the bank's right of set off, because it can use your money to offset the money that you got from the bank and didn't pay off. The right of setoff can put you in a tough situation, because the bank can simply grab your balance, making any checks that you have written against it bounce.

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the Minnesota Real Estate Journal and Minnesota Multi-Housing Association Advocate. Lander holds a Bachelor of Arts in political science from Columbia University.

Credit Repair Service: What Happens After You Pay Off The Credit Card?

Pay off credit reportIf you currently have a bad credit score, you might think paying off the entire amount will help your score. However, that isn’t precisely accurate!

In fact, it may slightly hurt your score as well. Let’s see why this happens

Paying off the credit card completely

It’s true that paying off your debt helps your score. However, you can achieve the same results with only paying a particular amount. Shouldn’t you get more advantage for fully paying the debt, then?

Not really; it doesn’t work that way. Your credit score is influenced by a number of different factors. Completely eliminating the debt affects your score in multiple ways.

Your credit utilization ratio is calculated by comparing the balance amount to the credit limit. For example, if you have a credit limit of $5,000 and you use only $1,000, your utilization ratio is 20%. Try to keep the ratio below 30% for better score.

Paying off the balance does no good for your score. If you have a $5,000 limit and have a balance of $4,000, your ratio will still be 80%. Even if you pay the amount same month, your utilization ration will remain same and that is what affects your score.

So when you pay off your balance completely, it won’t contribute much to the overall score. Instead, you should try to limit yourself to 30% utilization.

If you plan on paying the balance and not using the card anymore, reconsider this. If you don’t use the credit card for a while, your company might close it. This will decrease your credit limit and your credit score.

More than paying off the balance at once, paying them on time will boost your score. Make sure you follow the deadlines. It’s a good idea to make the payment before the deadline so it is cleared early.

If your credit reports show that you pay on time, you are considered good at dealing with credit.

Keep an eye on your utilization ratio. Don’t forget the 30% utilization rule.

Make sure to check your credit report at least once year. If you find an error, then report it immediately.

Keep your lines active if you can responsible manage them. A little balance and timely payments is safer than no utilization at all.

I paid off my credit card, and then the nightmare began

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Good thing I was desperate that morning to avoid work.

I was reading my junk mail when an invitation to check my credit score for free caught my eye. I hadn’t looked at it since February, when I paid off that massive credit card balance. Anticipating a nice upward bounce, I signed on. And blinked hard. Why had my score gone down, all the way from very good to merely fair?

Heart thumping, I opened the full credit report to find a 60-day delinquent notice – but that couldn’t be right. All my bills were on auto-pay and I’d received no late notices.

The problem, I found with mounting horror, was that Chase credit card I’d paid off to the tune of $22,000. The account was already closed, the online interface showed the balance as zero – what could be wrong? A week after I’d paid off the card, the bank had charged me residual interest, it turned out. And sent the bill to my ex-husband. And called my old disconnected home phone. And, most bizarrely of all, emailed my business partner’s defunct account.

Huge mistakes all around, obviously, most of them not mine. I instantly paid off the interest charges and late fees and called Chase to explain what happened. I imagined we’d share a good laugh about the comedy of errors and they’d agree to reverse the negative credit report.

Instead, I found myself in a nightmarish spiral that kept getting darker. The customer service rep bounced me to someone in the credit reporting division who escalated me to her supervisor, and then the press office put me in touch with Ashley Dandridge, senior specialist in Chase’s executive office.

They all refused to reverse the negative report.

“For you personally, I have not seen a way to change the reporting,” said Dandridge. In Chase’s view, they’d sent statements to the address on file, called the phone number on file, sent appropriate email alerts. “For us to update credit reports, it’s not something we can do once the account has been reported as delinquent.”

But….I’d paid off a balance of more than $22,000. The account was already closed. How, a week later, could they assess a new interest charge of $170? And then not notify me, when I’d held this account in good standing for 15 years and also had another credit card and a car loan and a business bank account with Chase? They had all my correct contact information on my other accounts. How had this one gotten so screwed up?

When you pay off a credit card, Dandridge informed me, you can’t trust a zero balance showing up online – you need to call customer service and get an actual payoff number. Otherwise, residual interest – that $170 – can be assessed. And with a joint account, notices are sent to the primary cardholder – in this case my ex.

Except my ex hadn’t put his new address on the account; Chase had added it from post office information, Dandridge found. And Chase had mysteriously ported my business partner’s defunct email account to this personal one. And would not let me update addresses or phone numbers on the interface but kept defaulting to the old incorrect ones – though I couldn’t tell that unless I signed back on and double-checked.

Chase representatives kept citing mysterious regulations when refusing to reverse the negative credit reporting on my account.

But what exactly are the laws governing how and when credit card companies report negative information, and whether they reverse it?

The short answer: None.

“Furnishing information to a credit reporting agency is an entirely voluntary act and certainly they can remove an account from the credit reporting system,” says Chi Chi Wu, a staff attorney specializing in consumer credit issues at the National Consumer Law Center. “There’s no prohibition against them fixing the reporting.”

Rod Griffin, the director of education for Experian, one of the big three credit reporting agencies, says that under the Fair Credit Reporting Act and Experian’s own reporting policies, banks and credit card issuers are required to report account status accurately.

“If you’re 30 days late, that has to get reported no matter what. In the vast majority of situations, that late report is going to remain.”

“The extenuating circumstances are not specifically laid out,” Griffin admits. “It’s the lender’s decision. The lender can tell the credit reporting company to remove a negative report.”

So how can a consumer with a valid argument get negative credit reporting reversed?

There’s a system for that, laid out by the government’s Consumer Finance Protection Board. You can also submit a complaint to the CFPB or even sue. The measures may not ultimately get the negative reporting reversed, but your explanation of the issue will remain in your file and be sent to anyone looking at your credit report.

My case was complicated by several gray areas: My payments were late, but for reasons that in my view were 90% not my fault. And ultimately, Chase agreed to reverse the negative reporting because they were unable to determine how my business partner’s email address became attached to my personal account.

But what if I hadn’t been a journalist with special access and investigative skills? How can any consumer approach their credit card company with a problem like mine and hope to reverse a negative credit report?

I had hoped to interview an executive at Chase regarding this question, but instead the company issued this written statement on my case:

“We made multiple attempts to reach this customer by calling several phone numbers on file and others given to us, as well as sending written notices to the address on file. It is important that customers keep their account profiles up-to-date so we can contact them with critical account information. Reversing accurate credit bureau reporting is extremely uncommon.”

Keep my account profile up-to-date? Chase’s Dandridge had gone over all my contact information with me to make triple sure it was now correct. But given that warning, and because I was once again trying to avoid work, I decided to check again.

And yes, it was still wrong.

What’s more, when I checked my credit report a month later, the late reports had not been reversed as promised. So I had to get back on the phone and email with Chase reminding them of their promise, and then hound them for two more weeks until I received confirmation that it had actually been done.

In early August, six months after I paid off my credit card and three months after I set out to correct the reporting, my credit report was finally clean again. And my credit score was up an astonishing 113 points, from Fair to Very Good, proof of how devastating the negative report had been.

The only problem? Despite formal disputes with supporting documentation, one of the credit bureaus still had my address wrong.

Will Paying Off Collections Improve Credit?

Pay off credit reportAs of this article, May 2017, paying off collections will not improve your credit score. It makes logical and very rational sense, that if you’re suffering from a low credit score, paying off collections and old debts should be evidence of your current financial responsibility.

Nevertheless FICO, the company that actually calculates your credit score, says: “The fact that you have collections listed on your credit report will almost certainly lower your FICO score.”

Moreover they say: “As far as your FICO score is concerned, two things are considered; has a collection appeared on your credit report, and when it was reported. So whether or not you pay your collections off is really a personal decision.”

This is the company that actually calculates your credit score, very clearly and directly saying paying off collections is a personal decision. And it won’t directly improve your credit score.

The Experian credit bureau, one of the big three, also says: “Paying the debt won’t necessarily help your credit scores. Accounts that get to the collection stage are about as negative as it gets. Only bankruptcy is worse. As a result, any improvement, especially right away, probably will be very minor.”

The remainder of this article is about how to pay off collections and so it will help your credit score. There is a process and the big secret is we need to clean your credit reports and remove this negative item, because this is what’s dragging your credit score down.

Anthony Sprauve, a spokesman for FICO, says a collection on your credit reports can damage and drag your score down by up to 100 points. And it’s open accepted industry knowledge the better your credit, the more it’ll drop if you’re smacked with a collection, paid or unpaid, on your credit file.

Look, FICO finally sees the obvious problem with their scoring model. They’ve released a new FICO 9 scoring algorithm that will ignore collections of $100 or less. It’ll also ignore collections with a $0 balance, in other words paid collections.

This new scoring algorithm is currently available, and to date we’ve yet to hear of even one, single, solitary lender using this new FICO 9 model. To clarify, as of 2017, the overwhelming majority of lenders are using the FICO 8 or earlier algorithm that will penalize your credit score, if you only pay off collections.

Part of the problem is the FICO scoring model is akin to the old school desktop computers and the latest Windows update. This industry has changed so much, but surely you recall days gone past where the latest Windows operating system was the greatest thing, since sliced bread. From Windows 95 to Windows XP, and so many more.

Each time you updated your windows operating system or got the latest, you had to buy it. The FICO scoring algorithm is exactly the same way. For these businesses, lenders, and creditors to use the new FICO 9 model they must purchase it.

Obviously, businesses aren’t in the habit of unnecessarily spending money, and as a result to the best of our knowledge no one is currently using the FICO 9 model. Nor are they ever required to purchase this new model.

The current problem with the FICO scoring model is when you just pay off debt in collections, the only change is to the status of the item on your credit reports. It’ll be changed to a paid collection.

This is still a derogatory item. Further, the current model often views this paid collection listing, as recent activity. So in the eyes of the credit scoring formula, you’ve recently screwed up and got a paid collection.

Instead of the truth and reality, that you’re taking active financial responsibility for what may have been a mistake years ago. And this isn’t even looking at your legal liability for this debt, which is not forever, but more on that coming up.

To fully understand how the debt system in our country works, we need to start at the beginning and look at an example. And then will discuss how exactly to go about paying this debt off, and so you will see credit score improvement.

Many types of debt can be sent to collections from medical debt, credit card charge off, utilities, loans, and many more. Typically your account will become delinquent and ultimately charged off by a lender after 180 days or about six months of non payment.

At this point the original creditor will either outright sell the collection rights to your account, or for large credit card companies for example, they’ll work with a collection agency on a consignment deal. This means, they’ll share any revenue collected on the account.

Generally this first collection agency will attempt to collect payment for another six months. If they’re unsuccessful they’ll report more bad credit on your credit reports, and sell the rights to your account to yet another collection agency.

And this can go on, and on, and on. It will depend directly on the size of your debt. The larger it is, the more collection agencies will purchase the rights and attempt to collect payment.

The most common result of unpaid collections is eventually what the industry calls a late stage debt collector will purchase the rights to your account, and they’ll sue you. This is very standard practice.

There’s many of these companies, they have attorneys on staff, and whose sole primary collection method is using legal avenues. Their goal is to get a judgement against you, because then they’ve really got you by the short and curlies.

Potentially you can have your wages garnished, liens placed against you and or your property, and even asset seizure. Not to mention, a credit judgement will absolutely annihilate your credit score. The exact collection methods do vary by state, so investigate your local listings.

The very first step to paying off debt in collections is to exercise your consumer rights, granted under the Fair Debt Collection Practices Act (FDCPA). This federal legislation is what regulates the debt collection industry.

One of the big takeaways from the FDCPA, is it gives you the ability to request validation on your debt. Essentially we’re asking the collection agency to prove this is a legitimate debt, after all we didn’t do any business directly with said debt collector.

This is simply performing the necessary due diligence, before you go parting with your hard earned money. You should make your debt validation request in writing and using certified mail, return receipt requested.

This will give you evidence they received your validation request. Because they’re required to respond by furnishing you with the documents and paperwork that validates and proves this is your account. Of course these materials will also show the original lender, dates of account activity, balance, etc.

If they fail to validate your debt, which is not uncommon, then in compliance with the FDCPA this debt is forgiven. You’re no longer legally responsible for payment. In addition to having the collections removed from credit report files.

If your debt is valid, in the paperwork you receive you next want to look for your dates of last account activity. You see, we’re looking at the statute of limitations here.

This state legislation places a maximum amount of time you, me, or John are responsible for repayment of a debt. This law does vary, so investigate your local listings.

Generally it’s about seven years from the date of last account activity. Once this time window runs out, the debt is no longer legally your responsibility. It may be morally, and it could be argued ethically, but there’s no debate it’s no longer your legal responsibility.

Beware, one of the most common and sneakiest debt collection methods is to re-age consumer accounts. Obviously this allows them to continue to attempt to collect payment, and believe it or not consumers are sued and found legally liable for debts past the statute of limitations.

One reason is because most consumers don’t bother showing up for their court date, and this means the judge must find in favor of the plaintiff or collection agency. But that’s another conversation for another time and place, so make sure to sign up for our free newsletter and join our congregation for more on how to fix credit score information.

The statute of limitations governs the overwhelming majority of types of consumer debt including: charge offs, credit cards, utilities, medical bills, retail, automotive, and many more. The few exceptions are defaulted federal student loans and federal income taxes.

Now if your account is legit, and within the statute of limitations, our next step is to negotiate a settlement agreement directly with this collection agency. There’s two essential keys in this step.

First, always negotiate to settle your debt for less. Frequently you’ll be able to settle in the ballpark of as low as 15% up to 40% of your total balance. This’ll often depend on how old your account is, generally the older, the less you’ll have to pay.

Second, in exchange for your payment, you must get the collection agency to agree they’ll stop reporting your account information to all three credit bureaus. Otherwise when you make payment, you’ll only change the status of the item to a paid collection.

In this step, we’re going to work on removing collections from credit report files, because as we’ve discussed this item is kryptonite to your credit score. Again we’re going to exercise your consumer rights, and specifically those granted by the Fair Credit Reporting Act (FCRA).

This federal legislation empowers you to dispute any item on your credit reports, so long as you believe the item is incorrect, misleading, or made in error. Naturally we’re going to dispute collection items on all three of your credit reports.

You can dispute a credit report item directly with the credit bureaus (Experian, Equifax, and TransUnion) online, over the phone, and by mail. Due to amendments, you can also dispute a data furnisher directly too, this would be the original creditor, lender, debt collector. The company reporting the negative information.

Once the credit bureaus get your dispute and deem it valid, they’re required to investigate the item. During which they’ll contact the collection agency and ask them to verify your account, the balance, dates of activity, etc.

As per your settlement agreement with the collection agency, they won’t verify your account when the credit bureaus investigate. And this results in the item being removed from your credit reports, because the FCRA clearly says every item on a consumer’s credit reports must be verifiable.

And if not, it must be removed. This is how to get collections off your credit report, and legally. However it’s not always this simple. Look no further than Julie Miller as an example.

She was slapped with 38 collection accounts, from a total stranger, an obvious mistake and after two years of pure frustration with the credit report dispute process, she sued Equifax and won $18.6 million. According to a New York Times article: “The credit bureaus are willing to tolerate these errors — and settle with consumers out of court — as a cost of doing business, according to credit experts and lawyers who work on these cases.”

Look, the credit bureaus have been fined repeatedly for violating consumer rights under the FCRA. In addition to endless individual consumer lawsuits. The debt collection industry we know, constantly violate consumer rights. They too are fined by our government for violating the law.

Your credit score is a lot like your Grade Point Average (GPA) in glory days past. If you’re acing all your classes but failing The Art of Walking (a real college course) it’s going to mess up your entire GPA. This principle holds equally true for your credit score.

We must clean up credit report dings, blemishes, and derogatory listings. This is the most effective, fastest, and efficient was to improve credit. And you don’t just have to live with bad credit for seven long years.

Did you know in just 2016, over 9 million negative items were removed from consumer’s credit reports. This includes millions of collection listings. We encourage our members to consider professional, legal, and legitimate credit repair companies to help.

One of the best firms are the Credit Pros. They’ve successfully helped client’s remove collections, late payments, charge offs, judgements, liens, and many more derogatory credit report items.

Get a free credit consultation today with a certified FICO professional by calling toll-free 1-877-418-7596. For more tips, techniques, and strategies on how to repair your credit with Dan Willis, sign up for our free newsletter and join our congregation.

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Make more money, spend less money.

Debt can really suck, but it’s also the default condition in our society. Student loans, car loans, mortgages… you’re seen as some kind of weird hippie if you don’t have these things. And that’s saying nothing of credit card debt.

“I can’t afford that right now” is no longer a thing. We want something, we pull out the plastic and buy it. Some rough mental justification comes into play. We say we’ll pay it off when we get paid next, or we’ll cut back on some other expense this month. But we rarely do.

And the debt begins to pile up. Soon, if we don’t pay attention (and most people don’t), we find that it has gotten completely out of hand.

I’m fortunate enough that I had this ‘awakening’ early enough to stop it before it got too far, but some people owe more than their yearly income in debt! If it’s that bad for you, you may want to consider things like bankruptcy or just not paying it, but for the purpose of this question, I’ll assume we’re talking about debt that is unpleasant but not catastrophic.

Your debt isn’t a financial problem, it’s a mental problem.

Your brain, your attitudes, your thoughts, your discipline, and your habits got you to where you are right now. Until those things change, nothing else will. Want to hear the most empowering thing anyone has ever told me?

“Fuck you, you don’t understand my situation!”

Listen, this is good stuff. The reason this idea is so powerful is that when it’s your fault, you can change it.

If you’re just a victim of circumstances, oppression, society, etc, you’re screwed forever. Take ownership of your life. Of everything.

Don’t be a victim.

This is simple but not easy, so take some time to figure this out. Got it? Good. Now you’re ready to pay off the debt.

If you’re like most people, your debt was accumulated for… nothing in particular. You just sort of drifted from one thing to another without really thinking about it. Without any goal or destination. This is the first thing to fix.

Decide on a definite goal to pursue. This could just be ‘paying off debt’, but it should probably be bigger than that. What you need is a direction to be moving in. Then, with every decision, ask yourself if it moves you closer or further away from your goal. Act accordingly. ( This book really helped me grasp these ideas, so I recommend you check it out if you’re struggling here.)

This alone should drastically reduce your frivolous spending, but let’s get more specific. Cancel cable TV. You don’t need it. Don’t go out to eat. Stop drinking so much.

Can you sell your car?

Can you sell your house and move somewhere more affordable?

Think of your debt as an emergency condition, because that’s what it is. This is not going to be comfortable or fun, but it is necessary.

Would you go out and have 6 beers and watch the game in the middle of an emergency?

Great, you’ve reduced your spending. You’ve quit spending your time on dumb shit, which for most people, leaves a big time vacuum. You could just sit back and relax, but you’re forgetting, your debt is still an emergency! You’re making progress, but can’t you do more?

Make more money.

Think about hobbies you could turn into a side hustle. Sell all the dumb shit you racked up the debt paying for on eBay or Craigslist. Work more hours at your job or consider a second side job. Create an information product about something you’re an expert in and sell it. Get creative here, this answer is different for everyone.

Kill your interest payments.

For credit card debt, look into a balance transfer to a card with a 0% interest period. Ideally, you want to pay it off completely before the interest rate rises, but at very least you can make a huge dent in it when 100% of your payment goes to principal.

Don’t go back to your old wicked ways.

OK, you’ve put in the effort. You’ve made the sacrifices necessary. You’ve paid off your debt. Congratulations! Take a moment to celebrate. Pour yourself a nice glass of whiskey and realize that you’re now in a position most Americans can’t even dream about. You don’t owe anyone anything!

This is a HUGE accomplishment, and not something to be taken lightly.

So don’t fuck it up, dummy.

You’ll find that your income is now much, much more than your expenses. All that money that you were putting towards debt payments is now sitting idle.

Don’t go back to your old consumeristic ways.

You’ve worked hard to elevate yourself to a higher level. Don’t fall backwards. Keep moving forward.

Put away a nice chunk of money as savings. Keep it in something safe. This is your “fuck you” money. (explained more here) If you never use it, good. Imagine never having to worry about what the boss says. Or the car breaking down.

Whatever shit comes up in life, you can handle it.

This is where life gets interesting.

Debt is the ultimate position of weakness. You’re beholden to people, and you can be destroyed very easily. A pile of cash and an income that vastly outpaces expenses is the ultimate position of strength.

Learn about investing. Try starting businesses. Spend more time with your family. Spend less time with your family. Your life is your own, and you get to decide what to do now.

This isn’t the ultimate end goal, it’s just the beginning. Getting to this position is what makes everything else possible.

I’ve just recently started down a similar path myself. I’m not done yet, and it will take time, but I’m putting in the work every day to make this happen. That’s what you have to do. I’m documenting the journey here. Remember, this won’ be easy, but it IS necessary, and the end result will be worth it.